Travel, Meals & Entertainment

The rules governing deductibility of business travel, meals and entertainment are rather confusing and complex. In this article we hope to help businesses better understand the rules by addressing questions about the deduction for business travel, meals and entertainment expenses. What expenses are deductible? When might they not be deductible? What if part of the travel is for personal purposes? What if I bring my family along? What are my record keeping requirements?

When do my travel expenses qualify for an income tax deduction?

Business travel expenses, including meals and lodging, are deductible when you travel away from your tax home and you stay away overnight. When your business travel does not include an overnight stay, then transportation expenses are deductible but meal and lodging expenses are not unless such expenses are billed to a customer.

What is my tax home for travel purposes?

For travel purposes, your place of business or your employer's office where you work is your tax home.

Where is my tax home if I have more than one place of business?

If you regularly work in more than one place of business, then you must determine your principal place of business or employment. Things to consider in the determination of your principal place of business or employment include time spent at each location, the importance of business activity in each location and the amount you earn at each location.

If you are a salesperson or you are self-employed, your residence is your tax home if you have an office in the home you use regularly and exclusively for the management and administration of your trade or business and there is no other fixed location where you perform these activities.

What travel expenses can I deduct if I have more than one place of business in the same general location?

The general rule is transportation expenses from your residence to your first business location and transportation expenses from your last business location to your residence are non-deductible commuting expenses. However, transportation expenses between business locations are deductible.

Are there instances when commuting expenses are deductible?

Generally commuting expenses are not deductible. However, if you work at a temporary job location, one expected to last less than one year, then commuting expenses are deductible under one of the following three circumstances:

• You have an office in the home that is your principal place of business,
• You don't have an office in the home that is your principal place of business, but the temporary work location is outside of the metropolitan area where you usually live and work, or
• You don't have an office in the home that is your principal place of business, but you have one or more regular work locations in the same trade or business. In this case, travel from home to the temporary work location is deductible even if it is not outside the metropolitan area.

What if the nature of my travel includes both business and personal reasons?

Travel expenses are deductible only if the primary reason for the travel is related to your trade or business. If your travel reason meets this business related test, then an allocation of costs must be done between business costs and personal costs in order to arrive at the deductible amount. For example, if your trip were strictly business in nature, what would your travel costs have been? Any travel costs in excess of this amount are not deductible.

If the travel is primarily personal in nature, then only the expenses at the destination that directly relate to your trade or business are deductible. The costs of the round trip travel expenses are not deductible under these circumstances.

What if family members accompany me on my business trip?

Additional travel costs for family members are not deductible except for a family member that is both an employee of your company and there is a bona fide business purpose for the presence of that family member.

How do I compute the deductible amount of transportation expenses for the business use of my vehicle?

Deductible car expenses include cost of gasoline, oil, repairs, tires, garage rent, parking fees, tolls, interest expense on loans used to purchase your vehicle and depreciation.

You must apply the business use percentage of your vehicle (business miles divided by total miles) to the total expenses to arrive at the deductible amount.

If your business use percentage is less than 50%, your depreciation deduction will be restricted to the straight-line depreciation method instead of the more generous accelerated depreciation formula. Your depreciation deduction may be further limited by the "luxury auto" rules. The luxury auto rules do not apply to vehicles with a gross vehicle weight rating above 6,000 pounds.

As an alternative to accounting for actual expenses and depreciation, you can determine your deductible costs by applying the standard mileage rate to your business miles. However, if you have ever used the accelerated depreciation, then you cannot use the standard mileage rate.

What is necessary for meals and entertainment expenses to be deductible?

To be deductible, you must discuss business with your dining partner before, during or after the activity or the activity must be directly related to the conduct of business. Traveling away from home overnight for business automatically qualifies meals as directly related to your trade or business if you dine alone or with a business associate. Additionally, the meal or entertainment expense deduction is generally limited to 50% of the cost. Dues to social, athletic and country clubs are not deductible.

Are there exceptions to the 50% deductibility rule for entertainment expenses?

Expenses that fall into the following categories are fully deductible:

• Amounts treated as taxable compensation to the recipient.
• Minor fringe benefits.
• Employer provided recreation or social activities.
• Items made available to the general public.
• Meals included as part of charitable sports events ticket packages.
• Meals provided to a group at which a group sales presentation is made.

What about company provided meals?

Company provided meals are fully deductible if more than 50% of your employees receive this benefit for the convenience of the employer. IRS regulations list three circumstances that satisfy the convenience of employer test.

• Meals are provided on premises to make sure employees are available for emergency calls that might occur during the meal period. ( Emergency calls must be reasonably expected to occur to qualify under this standard ),
• The allowed meal time is 45 minutes or less because of the nature of the business, or
• Employees cannot otherwise obtain meals during a reasonable meal period.

What records must I keep to support my deductions?

Keep written documentation as to amounts spent, dates of departure and return, destination, business purpose and number of miles driven for business purposes. Keep receipts for all expenditures exceeding $75, and for all lodging and air travel expenses even if less than $75. Keep records of the business discussion you had, who it was with, before, during or after "at home" business meals.

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